Archive for January, 2009

Recently several news pieces have made the claim that if the unemployment rate were calculated as it was during the Great Depression, the current rate would be close to double what it is, and creeping toward the formidable rates back in the 1930s.

The first problem with this statement is that there was no official unemployment rate until the 1940s. The ones we use today were reconstructed after the fact. As unemployment ballooned during the Great Depression a number of ad hoc attempts were made to calculate the rate, and the widely divergent results led private researchers and some state and local governments to experiment with various sampling methods. In 1940 the WPA began publishing statistics on those working (the employed), those looking for work (the unemployed), and those doing something else (hiding under the bed perhaps?) and so not in the equation.*

The second problem with the statement is that it's just not true. Although the BLS has refined their surveys and made questions more specific, conceptually the unemployment formulas have not changed, and the BLS's own analysis of test data shows that the impacts of several sets of changes on the overall numbers are minor.

In 1962 high unemployment and two recessions in three years led to the formation of The Presidential Committee to Appraise Employment and Unemployment Statistics, led by Robert Gordon, and tasked with reassessing the concepts used in gathering labor-market data. The Committee gave high marks to the BLS's integrity and suggested some improvements. For several years the BLS tested new survey techniques before instituting a number of changes in 1967.

Among the most important of these were the requirement that workers must have actively sought employment in the last four weeks in order to be classified as unemployed. A contact at BLS agrees that some discouraged workers were probably counted as unemployed before this change was made, but the effect of this migration is small. As they generally do, the BLS ran the new definitions alongside the old, in this case for 2.5 years, before adopting the new. Although the test series is not entirely comparable with the new series, the overall unemployment rate in the new series dropped by just one-tenth of a percent and, within that, the rate for adult men was down 3/10th, up 4/10th for adult women, and off a full point for teenagers. (Maybe they were just being teenagers: the requirement that they give a concrete example of their job search may well have reminded them of their parents and got the blank stare.) The Committee also recognized the need for more detailed data on persons outside the labor force, who are highly sensitive to changes in labor demand, and the BLS began collecting information on those who wanted a job although they were not looking for work in 1967.

In 1976, in order to provide more information on the hidden unemployed (who would presumably be part of the labor force in a full-employment scenario), the BLS first published the original U1 to U7 tables, which break out marginally attached workers. These tables were revised in the 1994 redesign (becoming U1 to U6) and the controversial requirement that discouraged workers must have sought work in the prior year was added. This change halved the number of discouraged workers, resulting in a complete break in the time series.

But those workers can still be found in the U-6 series, which is the broadest measure of labor underutilization, and it ain't a pretty sight. Up 4.8% over the year, U-6 currently includes an ugly 13.5% of the labor force. Update: In February U-6 unemployment rose to 14.8%. There's no need to fool around with the official unemployment rate (U3) to get an accurate picture of how quickly our labor market has deteriorated: the U1 to U6 tables tell the story.

Update 03/14/2009In response to a reader's comment:

There are three unemployment series available for the early 1930s: Stanley Lebergott’s, Michael Darby’s reworking of the Lebergott series, and the G.H. Moore series, available through NBER. (Michael Darby is the economist who pointed out that the Lebergott series included those on work-relief as unemployed. His series moves them to employed.) We used Moore’s series, which pretty much splits the difference between the other two. When you combine different series, usually necessary for long-term views, the series breaks themselves produce spikes or dips. Splicing the Darby series to the official BLS data makes it look like the unemployment rate jumped in 1940, which we did not want, and Lebergott’s inclusion of those on work relief as unemployed was in line with 1940 census practice.

Here are the yearly averages for the three series:

Moore

Lebergott

Darby

1929

3.2%

3.2%

1930

8.7%

8.7%

1931

15.9%

15.3%

1932

23.6%

22.9%

1933

23.4%

24.9%

20.6%

1934

19.1%

21.7%

16.0%

1935

17.6%

20.1%

14.2%

1936

14.2%

16.9%

9.9%

1937

12.2%

14.3%

9.1%

1938

18.4%

19.0%

12.5%

1939

16.3%

17.2%

11.3%

1940

14.6%

9.5%

Basically, if you want to evaluate the effect of government work programs, compare the Lebergott series to the Darby series. If you want a more readable trend line (while avoiding accusations of playing politics) use the Moore series.

*There is currently a bit of a fracas over the reconstructed unemployment rates for the period prior to official series. Stylish Stanley Lebergott, the BLS economist who put together the most widely used series, categorized workers on emergency relief as unemployed. In the 1980s data reclassifying these workers as employed were released, a definition in line with current practice and more widely accepted. In the past month or so, those wishing to show the WPA programs did little to alleviate unemployment have been relying on the unrevised Lebergott series, and those taking the opposite view the revised data. Of course, if you compare the two series it appears that between 1934 and 1941 WPA projects took 2 to 3.5 million workers off the unemployment roles, and shaved the rate by 4 to 7 percentage points.